Question

Bowman Specialists Inc. (BSI) manufactures specialized equipment for polishing optical lenses. There are two models-one (A-25) principally used for fine eyewear and the other (A–10) for lenses used in binoculars, cameras, and similar equipment. The following table shows the manufacturing cost of each unit is calculated, using activity-based costing, for these manufacturing cost pools. Cost Pools Materials handling Manufacturing supervision Assembly Machine setup Inspection and testing Packaging Allocation Base Number of parts Hours of machine time Number of parts Each setup Logged hours Logged hours Costing Rate $ 3.50 per part $23.80 per hour $ 5.70 per part $47.60 per setup $50.00 per hour $20.00 per hour BSI currently sells the A-10 model for $4,550 and the A-25 model for $2,000. Manufacturing costs and activity usage for the two products follow: Direct materials Number of parts Machine-hours Inspection time Packing time Setups A-10 $143.76 128 8.10 1.70 1.05 32 A-25 $69.44 99 5.40 0.95 0.54 16

Answer 1

Particulars	Amount ($)	Basis	A-25	A-10	A-25	A-10
Materials handling	3.50	parts	99.00	128.00	$       346.50	$       448.00
Supervision	23.80	hours	5.40	8.10	$       128.52	$       192.78
Assembly	5.70	parts	99.00	128.00	$       564.30	$       729.60
Machine Set up	47.60	Setup	16.00	32.00	$       761.60	$    1,523.20
Inspection and Testing	50.00	hours	0.95	1.70	$         47.50	$         85.00
Packaging	20.00	hours	0.54	1.05	$         10.80	$         21.00
Direct Materials	1.00		69.44	143.76	$         69.44	$       143.76
Total Cost Price					$    1,928.66	$    3,143.34
Selling Price					$    2,000.00	$    4,550.00
Profit					$            71.34	$      1,406.66
Gross Margin %					3.70%	44.75%
Answer 1:	Product is making a profit, Margin for Product A-25 is $71.34 and A-10 is $1,406.66
Answer 2a:
Particulars	Amount ($)	Basis	A-25	A-10	A-25	A-10
Materials handling	3.50	parts	95.00	124.00	$       332.50	$       434.00
Supervision	23.80	hours	3.40	8.50	$         80.92	$       202.30
Assembly	5.70	parts	95.00	124.00	$       541.50	$       706.80
Machine Set up	47.60	Setup	16.00	16.00	$       761.60	$       761.60
Inspection and Testing	50.00	hours	0.85	1.70	$         42.50	$         85.00
Packaging	20.00	hours	0.34	0.91	$          6.80	$         18.20
Direct Materials	1.00		49.45	92.65	$         49.45	$         92.65
Total Cost Price					$    1,815.27	$    2,300.55
Competitors Selling Price					$    1,875.00	$    2,400.00
Profit					$            59.73	$            99.45
Gross Margin %					3.29%	4.32%
Answer 2b:	Yes for both the products the company is making a profit but the gross margin went down significantly for product A-10
Answer 4:	The company should reduce the cost price.